Indonesia seeking way out of debt spiral

Indonesia seeking way out of debt spiral

HONG KONG (Dow Jones): While Indonesia's debt has reached
unsustainable levels, the government's immediate options to
restructure its debt remain limited, analysts say.

The new cabinet formed by President Abdurrahman Wahid will
have to reassure markets and prove its determination to go
forward with financial and economic reforms before Indonesia may
tap the debt market again.

Indonesia needs private capital inflows, but foreign investors
will stay out until the government succeeds in regaining
confidence through its economic reform program and political
stability.

Some analysts welcomed the reshuffle but noted that the new
cabinet members are unknown to the public. Despite an initial
hostility that sent the rupiah to the ground when Wahid announced
his new cabinet, analysts say that the new Indonesian rulers
should be given a chance.

"Certainly, the old cabinet was largely ineffective" and the
challenge before "the new cabinet is to change this situation,"
says William Belchere, head of economics and fixed income
research at Merrill Lynch Asia Pacific.

"However, the market reaction suggests that investors are not
yet convinced whether or not the new grouping will make much of a
difference," adds Belchere.

"Patience is a must" when dealing with Indonesia, advises
David Fernandez, head of Emerging Asian economic research at J.P.
Morgan.

But Indonesia doesn't have the luxury of time, considering
that its external debt currently represents 90 percent of the
country's gross domestic product and observers say that the ratio
is increasing, meaning that debt is growing faster than the
economy.

"The level of Indonesia's debt is not sustainable," says
Dominique Dwor-Frecaut, fixed income research analyst at Barclays
Capital Asia Ltd.

What are the options?

That's what the government, its advisers and international
institutions are trying to work out, but right now they're stuck.

J.P. Morgan, for instance, has been advising the Indonesian
government for years and "continue to work on various debt
management solutions," Fernandez says.

Indonesia was back on the international debt markets talk this
week with a potential Brady bond-style plan. The rumors were
quickly denied by the World Bank, which supposedly supported such
a bond.

"The ideas are quite preliminary," says J.P. Morgan's
Fernandez. "Indonesia is not in the position to do anything close
to a Brady exchange when one looks at the structure of its debt,"
he explains.

When Latin America defaulted, the U.S. offered to issue Brady
bonds which consisted of a debt exchange collateralized with the
purchase of zero-coupon bonds financed through additional funding
from the International Monetary Fund, explains Dwor-Frecaut.
Brady bonds are also backed by U.S. Treasurys.

One problem with an Indonesian Brady is that a large part of
the external debt that still needs to be restructured is private
debt.

The government's total debt, domestic and foreign, already
amounts to $134 billion, of which $65 billion are domestic bonds
issued last year to recapitalize Indonesia's banking sector.

After the government managed to reschedule $5.8 billion of
debt with the Paris Club of creditor countries in April and is
still waiting for the London Club of creditor banks to accept the
rescheduling of $850 million in foreign commercial loans, it
seems unlikely that it would be willing to take on the additional
burden of private debt.

Another solution is to tap the Japanese market with a Samurai
bond. Considering Indonesia's current selective default rating
from U.S. credit ratings agency Standard & Poor's Corp., analysts
say that any non-guaranteed issuance on the U.S. market is
impossible, unless Indonesia pays the price.

"The Samurai market seems to be more friendly and a Samurai
bond is definitely an option," says Warren Mar, head of Asian
fixed income research at BNP Paribas.

However, a Samurai "might still be difficult until the
political environment shows sustained improvement," unless Japan
guarantees the Samurai, says Belchere at Merrill Lynch.

But before any Indonesian international debt issuance
materializes, the government has to work out its domestic
bankruptcy laws, dispose of nonperforming loans taken over by the
Indonesian Bank Restructuring Agency, go on with its
privatization program and corporate restructuring.

IBRA, which has to dispose of 600 trillion rupiah of
nonperforming loans it took over from ailing banks, is also
looking for innovative ideas.

To achieve those goals, Indonesia needs foreign investment.

And we're back in the vicious circle.